John Campbell (Harvard): The Cross-Section of Household Preferences

Abstract: This paper estimates the cross-sectional distribution of preferences in a large administrative panel of Swedish households. We consider a life-cycle model of saving and portfolio choice with Epstein-Zin preferences which incorporates risky labor income, safe and risky financial assets inside and outside retirement accounts, and real estate. We study middle-aged stockowning households grouped by education, industry of employment, and birth cohort as well as by their accumulated wealth and risky portfolio shares. We find some heterogeneity in risk aversion (a standard deviation of 0.47 around a mean of 5.24 and median of 5.30) and considerable heterogeneity in the time preference rate (standard deviation 6.0% around a mean of 6.2% and median of 4.1%) and elasticity of intertemporal substitution (standard deviation 0.96 around a mean of 0.99 and median of 0.42). Risk aversion and the EIS are almost cross-sectionally uncorrelated, in contrast with the strong negative correlation that we would find if households had power utility with heterogeneous risk aversion. The time preference rate is weakly negatively correlated with both the other parameters. We estimate lower risk aversion for households with riskier labor income and higher levels of education, and a higher time preference rate for households who enter our sample with low initial wealth.